BANK 4.5.20 Conclusion about enforceability

(1) For rule 4.5.18 (1) (d), the legal opinion must conclude that, in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the banking business firm's claims and obligations are limited to the net sum calculated under the netting agreement in accordance with the applicable law.

Guidance

The Regulatory Authority expects the legal opinion to deal with the issue of which of the following laws applies to the netting:
•    the law of the jurisdiction in which the counterparty is incorporated or formed (or, in the case of an individual, resides)
•    if an overseas branch of the counterparty is involved — the law of the jurisdiction in which the branch is located
•    the law that governs the individual transactions
•    the law that governs any contract or agreement necessary to give effect to the netting.
(2) In particular, the legal opinion must conclude that, in the event of insolvency or external administration of a counterparty, a liquidator or administrator of the counterparty will not be able to claim a gross amount from the banking business firm while only being liable to pay a dividend in insolvency to the firm (as separate money flows).

Guidance

In some countries, there are provisions for the authorities to appoint an administrator to a troubled bank. Under statutory provisions applying in those countries, the appointment of an administrator might not constitute a ground for triggering a netting agreement. Such provisions do not prevent the recognition of an affected netting agreement if the agreement can still take effect if the bank under administration does not meet its obligations as they fall due.
Derived from QFCRA RM/2014-2 (as from 1st January 2015).